Canada’s securities regulators have adopted National Policy 12-203, Cease Trade Orders for Continuous Disclosure Defaults. The policy harmonizes the regulators’ approach to late or deficient continuous disclosure filings and outlines the criteria regulators will use in deciding whether to issue a management cease trade order (MCTO) or a general cease trade order (GCTO). An MCTO is generally preferable because it prohibits trading only by specified individuals – typically officers and directors – whereas a GCTO prohibits all trading in the issuer’s securities.
Scope of the Policy
The new national policy applies to the following types of continuous disclosure filings:
- annual information forms;
- annual and interim financial statements, management’s discussion and analysis, and management reports of fund performance; and
- certifications under MI 52-109.
Depending on the circumstances, the regulators may also apply the policy to other continuous disclosure defaults or institute enforcement proceedings.
Although the regulators recognize that issuers may sometimes have difficulty complying with filing deadlines because of circumstances beyond their control, they generally will not extend an issuer’s filing deadlines simply to allow the issuer to avoid being in default.
Criteria for Imposing a GCTO or an MCTO
A GCTO will usually be imposed on an issuer if the continuous disclosure default is unlikely to be rectified quickly and the circumstances that gave rise to the default are likely to continue. By contrast, an MCTO may be imposed if a default is expected to be rectified relatively quickly – which means two months in most cases. Other criteria affecting the type of cease trade order that may be imposed include whether the issuer generates revenue from operations, the trading level of the issuer’s securities and the issuer’s history of complying with continuous disclosure obligations.
Applying for an MCTO
An issuer should contact its principal regulator at least two weeks before the due date for a required filing and apply in writing for an MCTO instead of a GCTO. If meeting the two-week deadline is not feasible despite reasonable diligence, the issuer should briefly explain in the MCTO application the reasons for its delay. In the application, the issuer must also
- explain the reasons for the continuous disclosure default and its expected duration;
- explain how it satisfies the eligibility criteria for an MCTO instead of a GCTO;
- set out a detailed remediation plan that explains how the issuer proposes to remedy the default, with a realistic timetable;
- briefly describe its blackout policies and other policies and procedures relating to insider trading; and
- provide consents from the parties subject to the MCTO, including their acknowledgment that they will be prohibited from trading until two full business days after the continuous disclosure default is rectified.
Communication with the Marketplace
To be eligible for an MCTO, an issuer must issue a “default announcement” as soon as it determines that it will not comply with a continuous disclosure requirement; the regulators expect this determination to normally be made at least two weeks before the filing deadline. The default announcement (which must disclose, among other things, details about the default and the issuer’s remediation plans) may be contained in a material change report if the default represents or is related to a material change.
During the period of the MCTO, the issuer must issue biweekly news releases (“default status reports”) to, among other things, update the information previously disclosed, the remediation actions undertaken and the status of any investigation into events that contributed to the default.